Last week, No. 2 off-price chain Ross Stores (NASDAQ:ROST) reported better second-quarter results than larger rival TJX Companies (NYSE:TJX). Ross Stores posted a solid 3% comp sales gain last quarter, driving a roughly 10% increase in earnings per share. By contrast, comp sales rose 2% at TJX, with growth coming in slightly below that level in the U.S. TJX's EPS rose 7% year over year.
On Thursday morning, Burlington Stores (NYSE:BURL) -- the No. 3 off-price retailer in the U.S. -- reported even better business trends than either of its main rivals. Burlington's Q2 results also dramatically exceeded management's guidance and analysts' estimates. As a result, Burlington Stores stock surged 17% as of noon EDT on Thursday, reaching a new all-time high.
Burlington bounces back
After a multiyear run of stellar revenue growth and margin expansion, Burlington's growth began to slow in the final quarter of fiscal 2018. Growth slowed further in the first quarter of 2019, with comparable-store sales inching up just 0.1%. Management blamed a poor merchandise assortment in the ladies' apparel category for the slowdown. Adjusted EPS was flat year over year for the quarter.
Three months ago, Burlington's management predicted that sales trends would improve in the second quarter, with comp sales rising 1% to 2%. However, it warned that adjusted EPS might be flat or down slightly compared to the second quarter of fiscal 2018.
Burlington Stores crushed this guidance thanks to a strong 3.8% increase in comparable-store sales, solidly ahead of the growth rates TJX and Ross Stores posted. Total sales jumped 10.5% to $1.66 billion, beating the average analyst estimate of $1.63 billion.
The strong sales growth enabled Burlington to leverage its fixed costs, driving a slight increase in its operating margin. Adjusted operating profit rose 13% to $118 million. An unusually low tax rate added more momentum to the company's earnings growth, causing EPS to soar 19% to $1.36. This crushed the average analyst estimate of $1.14.
The outlook is solid, too
Back in May, Burlington's management stated that sales trends should improve in the second half of the year. Following the company's better-than-expected Q2 performance, that guidance now seems entirely realistic.
For the third quarter, comp sales should grow 2% to 3%, driving an 8.5% to 9.5% increase in total sales. Burlington expects another quarter of double-digit earnings growth, with adjusted EPS rising to between $1.37 and $1.41, compared to $1.21 in the prior-year period. Strong inventory management should make these goals achievable: Burlington ended last quarter with comparable-store inventory down 7% year over year, which will allow it to bring in lots of fresh merchandise during the third quarter.
Burlington Stores also raised its full-year earnings guidance to reflect its strong Q2 results. The company now expects to post adjusted EPS between $7.14 and $7.22 for fiscal 2019, up from $6.44 last year. That compares to its previous adjusted EPS guidance range of $6.93 to $7.01.
New management could take Burlington Stores to new heights
Back in April, Burlington announced that long-serving CEO Thomas Kingsbury would step down this fall and be replaced by Ross Stores veteran Michael O'Sullivan.
Over the past six years or so, Kingsbury and his leadership team have done an impressive job of improving Burlington's business model, driving massive margin expansion. (The company's adjusted operating margin reached 9% last year, up from less than 2% as recently as fiscal 2013.) That said, the No. 3 off-price retailer still lags its larger rivals in terms of profitability -- particularly Ross Stores, which has posted operating margins around 14% in recent years.
This is admittedly a tough time for retailers of consumer goods, but there's still plenty of room for Burlington Stores to improve its profit margin. O'Sullivan is set to take the helm next month, and his experience at Ross Stores makes him an ideal person to drive further growth and margin expansion. With business trends improving rapidly and a talented new leader coming on board soon, it's easy to see why investors are so excited about Burlington Stores stock right now.